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Answers (26)
Best Answer
ok, so saving is 5.65% *20000 + 147*12= 2894 a year.
2894/20000= 14.47%
14.47% is one hell of a guaranteed rate of return, do it!!!!
- Mark Juzwa, "Mark Juzwa"
- Contributions:85
Hello SFREW,
Well I guess there are a couple of other factors to take into consideration. One is do you feel that if you take the extra $20k out of savings that you will still have enough to have as an emergency fund in case you were to lose your job or something else drastic happens. The other question is how long to you plan on staying in the home in order to breakeven of putting out the extra $20k and incurring the monthly savings while not having to pay PMI.
Last comment, and no many people are aware of this but the IRS did change the tax codes last year so that people that are paying PMI are allowed to write it off just like they write off their mortgage interest. However, just like a lot of things this amount you can write off is tiered and based off what your Adjusted Gross Income is on your 1040 Form line 38.
So just something to think about and maybe save your $20k for a rainy day if ever needed because of the state of the economy. Because you never know it might be harder to get that money out later if you really need it or if housing prices continue to fall.
Good Luck..hope this helped!
- Bentley Advisors
- Contributions:294
I didn't follow the whole crazy thread, but one important overlooked factor about saving a dollar vs earning a dollar is that earned income is taxed. Savings are not. It's a simplification, but I'd rather save a dollar any day over earning an extra dollar since savings drops straight to the bottomline...dollar-for-dollar. Whereas, earned income does not.
- Chris A. Lewis
- Contributions:208
I would get rid of the PMI only if you have a good amount of savings left over in case of an emergency. Some experts say you should have at least 8 months of savings but I personally feel 10 is better in this economy.
- HomeSand.net, "White Picture"
- Contributions:4403
Azrob is right, you need save much the money as possible, pay to yourself at high interest rate.
Jaime is right also, in this economy, the money in your pocket is your money !
Jaime is right also, in this economy, the money in your pocket is your money !
- Tammy Stockdale, "Colorado Mtg Broker"
- Contributions:6995
Rob and I may not see eye to eye, but he knows his stuff....
Good to see you back Rob.
Good to see you back Rob.
- mina36
- Contributions:3478
Jamie, Rob knows whereof he speaks, and you..... you have no clue.
Jaime sent me another insulting email about this thread.
Yes, Jaime, I believe in paying off higher interest rate debt, something you clearly don't condone.
I also believe most homeowners are better served by saving till they have 20% downpayments. You have continiously argued that less downpayment is better...
So which loans default more often? zero down or 20% down? Heres a hing: why did fha get rid of seller funded downpayments.
You've sent me multiple personal insults, ones which I can assure you wouldn't dare say to my face. Its ok, with your skills and attitude, no doubt you can get a job at circle K as this career ends.
Yes, Jaime, I believe in paying off higher interest rate debt, something you clearly don't condone.
I also believe most homeowners are better served by saving till they have 20% downpayments. You have continiously argued that less downpayment is better...
So which loans default more often? zero down or 20% down? Heres a hing: why did fha get rid of seller funded downpayments.
You've sent me multiple personal insults, ones which I can assure you wouldn't dare say to my face. Its ok, with your skills and attitude, no doubt you can get a job at circle K as this career ends.
that poor linear thinking of mine caused me to buy six homes, all with 20% down out of the last crisis, then sell four of them before the peak. All of them made cashflow as rentals, during the nearly 10 years I had them, and then a tremendous windfall when I sold them.
Lets say SFREW had a credit card debt of $20,000 at 14% interest, and $30,000 in the bank. I would advise the same: pay the credit card off, its the same as getting a 14% return on your money.
I suppose if he went into bankruptcy that would be bad advice!
Lets say SFREW had a credit card debt of $20,000 at 14% interest, and $30,000 in the bank. I would advise the same: pay the credit card off, its the same as getting a 14% return on your money.
I suppose if he went into bankruptcy that would be bad advice!
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
Well it shows, linear thinking. You still miss the whole point of Cash in the bank vs cash converted to equity, Cash was spent with the hope of a strait line savings deep into the future. But life changes and it is important to look at the whole picture.
I tried to point out how your analysis, though valid, should fall at the bottom of a clients consideration. Simplifying mortgages and their derivative has caused this current capital implosion. Yes, these were the cream of the crop from Wall Street, MIT and Harvard. They forgot that life's reality is different than their hypothetical model. My Econ professor would always start his modeling theories with ("WITH TIME AS A CONSTANT...") Reality is "time as a constant" does not exist.
Good luck in your teachings Professor. Congratulations on your knowledge, Even Greenspan admitted to not understanding the whole picture. Got to run, but I am sure we will meet again.
I tried to point out how your analysis, though valid, should fall at the bottom of a clients consideration. Simplifying mortgages and their derivative has caused this current capital implosion. Yes, these were the cream of the crop from Wall Street, MIT and Harvard. They forgot that life's reality is different than their hypothetical model. My Econ professor would always start his modeling theories with ("WITH TIME AS A CONSTANT...") Reality is "time as a constant" does not exist.
Good luck in your teachings Professor. Congratulations on your knowledge, Even Greenspan admitted to not understanding the whole picture. Got to run, but I am sure we will meet again.
- NTETS, "Mr Caveat"
- Contributions:6436
if you plan to live there 10+ more years from today, and are comfortable that you could be stuck there longer, then and only then would i recommend putting your own money behind a depreciating asset. rob is right the return could be great, but any money you put behind the home is then effectively "gambled" on when, where and how that asset appreciates over time.
i don't know what your market is, i can guess based on the loan amount that you are in one of the more reasonable states, but fear is irrational and you may see the entire deposit swallowed up. probably not, but thats why they call us doomers... we always plan for the worst, and enjoy the rest
i don't know what your market is, i can guess based on the loan amount that you are in one of the more reasonable states, but fear is irrational and you may see the entire deposit swallowed up. probably not, but thats why they call us doomers... we always plan for the worst, and enjoy the rest
Jaime:
I am a professor of mathematics. My area is applied mathematics, to econometrics and finance. My graduate work is from UC Berkeley, where did you go?
You are showing a complete lack of understanding of cashflow, and time value of money...
ever heard "a penny saved is a penney earned?" well it applies here: reducing a payment is precisely the same as earning money.
You have continiously confused a fairly simple calculation here. By the way, 'mortgages are complex instruments'- maybe to you, they are simple to me.
I am a professor of mathematics. My area is applied mathematics, to econometrics and finance. My graduate work is from UC Berkeley, where did you go?
You are showing a complete lack of understanding of cashflow, and time value of money...
ever heard "a penny saved is a penney earned?" well it applies here: reducing a payment is precisely the same as earning money.
You have continiously confused a fairly simple calculation here. By the way, 'mortgages are complex instruments'- maybe to you, they are simple to me.
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
OFF Topic again, again with my excuse to the group, but I was addressing your points.
Mortgages are complex instruments that can cause extreme harm to ones personal financial health if not properly used. Each client is different and hopefully if "SFREW" still is around he picked up some important points to consider on his original Question: "Is it Smart".
I would stick with Real estate sales and RE advice.
What is with the "ill splain it to you..."
You do not know me, show some respect.
well, I guess if the original poster's future financial planning include defaults and failure to stay current on his mortgage, you have the answers! That certainly didn't seem like his intent in the question to me.
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
A little off topic. Rates have very little to do with the current foreclosure problem. If rates mattered why new high foreclosure numbers in December? You would think historic low rates would not coincide.
I heard affordability is at the highest in many areas due to low rates and low prices. But foreclosures continue. In 1980, with rates in the teens you did not have this massive problem. Give me a 25,000 home and I will gladly pay 15% interest.
It is prices and Job losses. Investors where 50% of the market in Arizona in 2006. Prices and declines in equity is what has made the walk away and jingle mail popular. It is an investment decision not to hold on when you are 100K to 200K underwater. Let the Bank eat your mistake.
Loan Modifications are made at 3% rates and statistics show over 60% are again in default. Rate is not the issue. Equity and Cash. You lose your job, cash suddenly becomes very important.
Yes, I know of clients that are kicking themselves for putting all their savings into a purchase. They are taking a real cash hit while those that put minimum down have the Bank underwater.
I see many FHA clients with underwater loans and smiling now since negative value is not relevant. They can refinance, they have the cash vs the bank has the debt. Capiche?
I heard affordability is at the highest in many areas due to low rates and low prices. But foreclosures continue. In 1980, with rates in the teens you did not have this massive problem. Give me a 25,000 home and I will gladly pay 15% interest.
It is prices and Job losses. Investors where 50% of the market in Arizona in 2006. Prices and declines in equity is what has made the walk away and jingle mail popular. It is an investment decision not to hold on when you are 100K to 200K underwater. Let the Bank eat your mistake.
Loan Modifications are made at 3% rates and statistics show over 60% are again in default. Rate is not the issue. Equity and Cash. You lose your job, cash suddenly becomes very important.
Yes, I know of clients that are kicking themselves for putting all their savings into a purchase. They are taking a real cash hit while those that put minimum down have the Bank underwater.
I see many FHA clients with underwater loans and smiling now since negative value is not relevant. They can refinance, they have the cash vs the bank has the debt. Capiche?
Now, to answer your second point:
"how many cleints are in pain for having put all their savings into a home to skirt PMI?" So, if they put less down they wouldn't be in pain when their home value drops? are you joking? the only way that helps anybody is if they default on the debt!
People aren't losing homes because the 'put too much money into them' they are losing homes because they can't afford the payments. A lower monthly payment makes that less likely.
"how many cleints are in pain for having put all their savings into a home to skirt PMI?" So, if they put less down they wouldn't be in pain when their home value drops? are you joking? the only way that helps anybody is if they default on the debt!
People aren't losing homes because the 'put too much money into them' they are losing homes because they can't afford the payments. A lower monthly payment makes that less likely.
Alright Jamie, lets lay the cards on the table:
client saves an additional $228.25 a month, by paying loan loan down to 80%.
You claim they can invest the 20k in 'something better' ok what rate you got? 6% without risk? lets just assume 10 years to compare:
20000*(1.06)^10 = 35817
now, if he gets the same return on his $228.25 each month over the 10 years, $37592.5
So, he will have more than $2000 more in the bank but that is not all:
His loan balance will be substantially lower, since he starts owing $20k less, and his payments will still be lower for the next 20 years.
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
I guess you missed my point. Your calculation is at the bottom of the heap in factors to consider. Saving 147 for 100 months is not the same as earning an income stream or cash from an investment for 360 months. How many clients are in pain today for having put all their savings into a purchase to skirt PMI? FYI, 80-10, 80-15 WERE popular because PMI was not tax deductible, today it is.
But the point is that each client needs to consider his own personal risk and investment profile. (Age and tax bracket, net worth, etc).
Here is my list (of the top, without taking too much time)
Total liquid Reserves of client.
Total cash equivalent assets, investments etc.
Mortgage Payment in relation to income and income stability
Has he fully funded retirement accounts, Ira, Roth etc.
Age to retirement and tax bracket.
When did he purchase the home or when did he refinance last.
Has he fully recouped the cost, if not add them back.
Current total one time costs of the refinance vs current cost of funds.
Savings cost analysis vs opportunity costs of the debt down payment.
But the point is that each client needs to consider his own personal risk and investment profile. (Age and tax bracket, net worth, etc).
Here is my list (of the top, without taking too much time)
Total liquid Reserves of client.
Total cash equivalent assets, investments etc.
Mortgage Payment in relation to income and income stability
Has he fully funded retirement accounts, Ira, Roth etc.
Age to retirement and tax bracket.
When did he purchase the home or when did he refinance last.
Has he fully recouped the cost, if not add them back.
Current total one time costs of the refinance vs current cost of funds.
Savings cost analysis vs opportunity costs of the debt down payment.
Jaime, my mistake.
ok, if he lowers his loan balance, he gets a return of 4.875%not taking PMI into account. (earlier I confused myself with another calculation I was working on, and used the wrong interest rate)
so 0.04875*20000 = $975
Yes, he really gets that return. Saving yourself from paying $975 is precisely the same thing as making $975 on an investment.
Now add in PMI. Maybe his new loan its a different amount, he can calculate it with new figures when the appraisal comes in, but for now i'll use the old amount:
$147*12 = $1764
so the total amount he will save himself is 1764+975=2739
the return rate is 2739/20000=13.7% still a hell of a return.
In fact, this is the reason that 80/20 and 80/15 products became so popular when they were available.
ok, if he lowers his loan balance, he gets a return of 4.875%not taking PMI into account. (earlier I confused myself with another calculation I was working on, and used the wrong interest rate)
so 0.04875*20000 = $975
Yes, he really gets that return. Saving yourself from paying $975 is precisely the same thing as making $975 on an investment.
Now add in PMI. Maybe his new loan its a different amount, he can calculate it with new figures when the appraisal comes in, but for now i'll use the old amount:
$147*12 = $1764
so the total amount he will save himself is 1764+975=2739
the return rate is 2739/20000=13.7% still a hell of a return.
In fact, this is the reason that 80/20 and 80/15 products became so popular when they were available.
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
Allen, nice answer and the correct on in my opinion.
Hey Lucy, if you read my answer I left it up to the client.
You put your self as all knowledge and punched in "BAD answer".
Again, explain how savings equals a real cash return.
Would your advice be the same to SFREW: IF;
SFREW has total cash reserves or savings of 30,000?
or has a tax rate of 45% and will needs to liquidate another investment?
How about he feels his return on cash is over the 5.625% and has a history or instrument that yeilds him 6%. At the end of the 30 years he would have over 120,000 + in cash! Your advice is put the cash equity into the home. Cash is not the same as home equity.
Paying down a mortgage does not produce cash but saves money. The 147 (Which Allen corectly pointed out) could actually be much lower if the appraisal come in strong.
What if in 2 years, this federal cash infusion and lowering of Mtg raes does work and pushes home values higher? He can re appraise to remove MI? But your advice was; 20,000 in cash gone into a non producing asset.
The 20,000~ reallly saves the MI for only about 100 payments or 8 years. So calculating a savings should take this into consideration. 20,000 in an investment does produce real cash. 20,000 into paying down a mortgage does not.
Only his personal loan advisor knows all the facts about the client, and for you to slam anyones opinion does not help the Zillo community of lenders.
Anyone?
Your turn?
- Allen Mische, "Allen Mische"
- Contributions:33
You should see what the appraised value comes in at and then make a decision. PMI factors are different at 85%, 90%, and 95% LTV (Loan to Value). At 85% LTV, the PMI may be so low that you may decide that this LTV with PMI is benefical to you and you can use your savings for other purposes.
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
Ok. I'll bite. Roberto Explain?
Receive 5.625 from whom?
Receive 5.625 from whom?
- Barry Dalton, "Barry Dalton"
- Contributions:492
$147 per month x 12 = $1764 per year on a $20,000 investment.
Rough math = 8.8% return - not counting the lower P&I difference on the lower mortgage balance.
Rough math = 8.8% return - not counting the lower P&I difference on the lower mortgage balance.
BAD answer Jaime!
He will receive 5.65% + eliminated PMI charge/amount of quity reduced. This could be an unbeatable return!
He will receive 5.65% + eliminated PMI charge/amount of quity reduced. This could be an unbeatable return!
- Jaime H. Ayalde, "Jaime H"
- Contributions:61
Do you think you can re invest the 20K and earn over 5.65% on your cash risk free?
(Not taking into considerations your total reserves and overall personal profile, age, assets, tax bracket etc....).
To simplify the question; If the answer is yes, Do it, No do not.
- Barry Dalton, "Barry Dalton"
- Contributions:492
Yes, if you are comfortable in career, income, home and are not depleting your emergency reserves, I say it is worth taking the mortgage amount down to 80%.
Rough math appears to be an 8.8% return on your investment.
Rough math appears to be an 8.8% return on your investment.
eliminating pmi by paying a chunck off of my mortgage, is it a smart move
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